Bay Company began using the allowance method in 2014. On January 1, 2014, Bay had a $3,000 balance in the Accounts Receivable account and a zero balance in the Allowance for Doubtful Accounts account. During 2014, Bay provided $25,000 of service on account. The company collected $21,000 cash from account receivable. Uncollectible accounts are estimated to be 2% of sales on account.
The net realizable value of Bay's accounts receivable as of December 31, 2014 was
A) $7,000.
B) $3,500.
C) $6,500.
D) $500.

Question

Quizplus · Accepted Answer

To calculate the net realizable value of the accounts receivable, we need to first calculate the balance of the allowance for doubtful accounts. Bay estimates that 2% of sales on account will be uncollectible, so the estimated uncollectible amount is:

$25,000 x 2% = $500

To record this estimated amount, we will debit the Bad Debt Expense account and credit the Allowance for Doubtful Accounts account:

Bad Debt Expense   $500
Allowance for Doubtful Accts   $500

The balance in the Allowance for Doubtful Accounts account at the end of 2014 is therefore $500.

The net realizable value of the accounts receivable is:

Accounts Receivable - Allowance for Doubtful Accounts = $3,000 - $500 = $2,500

Since Bay was able to collect $21,000 cash from accounts receivable during 2014, the total net realizable value of Bay's accounts receivable as of December 31, 2014 is:

$2,500 + $21,000 = $23,500

Therefore, the correct answer is choice C ($6,500).

Bay Company Began Using the Allowance Method in 2014